It's All About Trust Another Option in Estate Planning

Once an estate planning operative for only the rich and famous, trusts are commonly used today to facilitate estate planning for everyone. While empty-nesters downsize and seek out residences that are more maintenance free—such as co-ops or condos—they are also seeking to create an estate plan that insures a distribution of their assets with minimum tax consequences. Accordingly, co-op boards are increasingly faced with requests to approve transfer of ownership of co-op apartments to trusts. What are the ramifications of such transfers, and what should a board do when faced with such a request?

Generally, the co-op is at no greater risk with a trust as a shareholder than it would be with an individual. Therefore, there normally is no legal reason for a board to reject a requested transfer. However, a review of relevant documentation by counsel—as well as the reasons prompting the proposed transfer—is prudent to insure that there are no unusual issues raised with regard to the transfer of the cooperative’s stock shares to the trust.

Obviously, the trust instrument itself should be reviewed. It is appropriate to require the shareholder requesting the transfer to bear the burden of paying the co-op’s legal fees incurred in reviewing the necessary documentation associated with the requested transfer to the trust. Some trusts are such that the shareholder reserves the right to use the cooperative apartment for a fixed number of years.

In order to insure that an apartment is occupied only by the initially approved shareholder (the grantor to the trust) and his or her immediate family after the shares are transferred to the trust, the board should require the shareholder and his or her trustees to execute an occupancy agreement stipulating that the grantor and the grantor’s immediate family will be the sole occupants of the apartment throughout the term of the trust.

Furthermore, to insure that maintenance payments and assessment charges are made during the term of the trust, prior to approving any transfer to a trust, the board should seek a personal guarantee of the proprietary lease obligations by the grantor.

Finally, the board should receive written confirmation from the grantor that:

• The trust agreement provided to the co-op for review is the agreement currently in existence and that there are no amendments.

• That the trustees are as represented in the trust agreement and that they have the authority to execute the proprietary lease and occupancy agreement.

• That any successor trustees are bound by the building’s proprietary lease and occupancy agreement.

Thus, during the fixed term reserved by the grantor to reside in the apartment, there are few issues of concern to the board. However, upon the expiration of the fixed term, the shares held by the trust pass to the designated beneficiaries. The grantor will then have to sublease the apartment from the designated beneficiaries.

Therefore, when co-op board considers the initial request to transfer the apartment to a trust, it must also decide whether to consent to the subsequent transfer to the designated beneficiaries at the expiration of the fixed term of the trust, and possibly the sublease of the apartment to the grantor.

If the board decides to consent only to the initial transfer of the shares to the trust—leaving the issue of a subsequent transfer to designated beneficiaries and a possible sublease agreement for later review and consideration—then the board must make that clear in a writing countersigned by the grantor.

In sum, although a co-op board has an absolute right to withhold consent to a trust transfer for any reason, it is clear that a board can, with the advice of counsel, obtain adequate insurance such that there will generally be no legal reason for a board to reject a proposed transfer of shares to a trust. n

Al Pennisi is a principal with the Queens law firm of Pennisi Daniels & Norelli, and is president of the Federation of New York Housing Cooperatives & Condominiums (FNYHC).

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3 Comments

  • When applicants submit financial documents to prove financially stability from another country should it not be in English especially if the banks have offices in NYC? Everyone does not read another language nor do they understand the foreign currency which fluctuates on a daily basis. I was told when I questioned it that it was acceptable because another board member could read the language. Are we supposed to take the word of that board member at face value especially when it was a friend of their's? I didn't feel comfortable about it because things have a tendency to bite you later.
  • Has there been, or could there be, an update to this article from 2006. Neptune Towers in Long Beach, NY is currently trying to come up with guidelines for acdeptable trusts for our shareholders. We do not allow transfer to shareholders' family without the basic application process used for new shareholders. Thanks.
  • can a shareholder who has transferred his shares to a Trust hold an office on the Board. can the shareholder vote at the Annual meeting.